Save Indian startups

This petition is on behalf of hundreds of startups in India, that are distressed by the spate of notices and assessment orders from the Income tax department which are in contradiction to the spirit of the Startup India movement and are detrimental to the ease of doing business in India. Many startups have received assessment notices and orders in 2017 asking to pay a sizable portion of the fund raised as Income tax.

Imagine founders whose startups have even shut down are being forced to recognize their funding in previous years as income and pay tax and penalty!

The below 2 issues need to be addressed immediately to save the Startup India movement.

Issue 1: Fair Market Value (Section 56(2)) Method of Valuation According to IT Act: Valuation is based on valuation certificate by a valuer recognized by the government. If Startups, which are asset light in the beginning, raise capital on the basis of DCF projections – these projections are being questioned by the department wherein the department blatantly disregards the entire basis of valuation in practice and looks at applying only the net book value method which would render the valuation of almost all the startups in the country as negatively valued com.

Practically speaking, valuation is a free market agreement and Income Tax should only be levied on realized gain and not notional gain.

Issue 2: Disallowance of Investment (Section 68) A lot of startups have been asked to produce evidence of creditworthiness of investors – including audited statements, Bank statements and ITR details. Ideally complying with legal PAN tagged transaction is what startups can do and beyond that onus is on the department and not startups.

Failing to produce these documents, the IT department has the authority to convert this entire investment as taxable income!

Through a notification dated 14th June 2016 government attempted to define startups to offer more clarity on valuation and other benefits – however this does still not suffice. There are multiple acts like the Income Tax Act which have not yet caught up with the modern day valuation methodology.

These instances aren’t conducive for startups to thrive and this will incite fear among founders and investors alike. If our honourable Prime Minister's vision of Startup India needs to become reality, then these provisions need to be revised immediately in the coming budget session.

This appeal is on behalf of entrepreneurs who are suffering with the burden of having to defend their right to operate in India and create jobs with a system that seems to imply that everyone has mal-intent by default.

We seek support of everyone in the ecosystem to sign this petition so that we can focus on growing businesses and enabling wealth creation for everyone, including our country without having to constantly look behind our back worrying about unsubstantiated scrutiny.

We request Honourable Finance minister to strongly review Section 56(2) and Section 68 with retrospective effect to help us focus in building our startups.